Metals/mining firms under increased water risk

WATER risks are threatening a majority of metals and mining companies worldwide, but those taking steps to manage the resource are experiencing better financial outcomes, says a report by the Carbon Disclosure Project and Eurizon Capital.

Max Pichon

Up to 40% of a metals and mining company’s value is based on its ability to exploit commodity reserves. However, insufficient volume or quality of water will hinder access to those reserves, significantly threatening business operations, the report states.

US company Newmont Mining, for example, has spent US$200 million on larger water reservoirs to re-secure its license to do business in Peru.

The report utilises the CDP data collected from 36 metals and mining companies, with a total market capitalisation of $US773 billion, which responded to CDP’s 2012 Water Information Request. It includes responses from 13 Australian mining/metals companies including BHP Billiton, BlueScope Steel, Atlas Iron, OneSteel and Sims Metal Management.

It analyses the critical implications of water for the sector and sheds light on how these companies have already been affected by issues, and how they are accounting for and valuing water, in order to build both short and long term resilience.

Water stress a key concern for majority

Almost two thirds of respondents (64%) have experienced detrimental water-related business impacts in the past 5 years. Corporations such as Anglo American, BHP Billiton and Rio Tinto report that they have already experienced significant water impacts that have led to changes in their company practices.

Flooding, water shortages and decreasing water quality are the predominant causes of these impacts, which resulted in an increase in operating costs for more than half of those reporting detrimental impacts, and production or transport disruptions for more than a third.

With growing populations and increasing industrialisation coupled with declining water quality respondents are facing significant competition for this scarce resource and impacts such as operational disruptions are predicted to continue.

More crucial is the fact that 92% of respondents identified some form of water risk that has the potential to generate a substantive change in their business operation, revenue or expenditure now or within the next 5 years.

Increased water stress is the most commonly reported risk which is consistent with the finding that one third of respondents have the majority of their operations located in regions subject to water stress or scarcity.

Flooding is the next most frequently reported risk, followed by declining water quality, which is notably the risk reported as most likely to impact business now. Anglo American Platinum takes this risk into consideration in their business planning, as poor water quality could lead to “production setbacks and social pressure due to local tensions”

It should also be noted that 25% of respondents have not considered other risk indicators beyond water scarcity such as increasing regulation, inadequate infrastrucutre or community opposition.

As far as regulatory risks are concerned, respondents report these risks as predominantly mid to long-term. Respondents identified five categories of substantive regulatory risks. Among these, tighter regulation of discharge water is the most commonly reported.

Teck Resources noted, “more stringent discharge standards create operational challenges and may require temporary closure and production breaks.”

Changes to water withdrawal rights and allocations are the regulatory risks most likely to impact now or within the next five years. This would greatly impact metals and mining companies if changes are not anticipated. For example, Barrick Gold reports that any changes would, at least temporarily, “reduce production at operating mines, and limit the development of new mines or mine expansion.”

In addition, 39% of companies are now experiencing increased costs as a result of negative water impacts. American aluminum producer Alcoa, for example, lost US$130 million (or 6.5% of earnings before interest, taxes, depreciation and amortisation) in 2011 due to flooding damage.

Some 530 investors representing US$57tn requested 57 of the largest metals and mining companies in the Global 500 and other water-stressed markets disclose their water data through CDP. The report is based on information provided by 36 businesses. The companies that failed to meet this investor demand for water data account for US$160bn of market capitalisation and are listed in the report.

The report recommends that metals and mining companies revisit traditional approaches to valuing to take account of the uncertainty surrounding a company’s ability to access adequate water.

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